CSE Global - UOB Kay Hian 2018-08-15: 2Q18 Results In Line; Benefiting From More Small Projects

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CSE Global - 2Q18 Results In Line; Benefiting From More Small Projects

CSE posted an in-line 1H18 core net profit of S$10.0m (+67% y-o-y) which accounts for 58% of our full-year estimate. 2Q18 core net profit grew 44% y-o-y.
CSE is targeting to maintain a full-year dividend of 2.75 S cents/share for 2018.
Key positives include an improving gross margin and more order wins for smaller projects. However, CSE continues to see a lull in large greenfield O&G project wins.
We maintain our 2018 net profit forecast but trim our 2019 net profit forecast by 5.6%. Maintain BUY but cut our PE-based target price by 5.6% to S$0.58.

CSE Global’s (CSE) 2Q18 core net profit was in line and up 44% y-o-y. CSE has also announced an interim dividend of 1.25 S cents/share (1.25 S cents/share in 1H17).
Much of its growth was driven by its US segment with 2Q18 revenue from the region growing 43% y-o-y, mainly attributed to the higher recognition of revenues on some large greenfield projects and higher time and material (T&M) revenues, both of which contributed to a strong turnaround in EBIT of S$2.9m in 2Q18 vs S$0.1m in 2Q17.

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Gross margin improved notably in 2Q18, up 1.2ppt y-o-y. This was due to:
1. contributions from more small projects which usually bring in higher gross margins;
2. better conditions in two key markets, US and Australia; and
3. ongoing cost management in streamlining acquired entities.

CSE is starting to win more small orders, especially for the oil and gas (O&G) segment. This is expected to help CSE maintain profitability at around S$4m per quarter.
Although there are no large greenfield O&G projects expected for the next 6-12 months, CSE is actively exploring opportunities for large infrastructure projects in Australia, Asia and the US.

CSE expects to sustain its gross margin at 26-27%. Beyond 2018, there could be room for further margin improvements as most of its customers in the O&G segment are benefiting from better oil prices. This could provide better headroom for CSE to raise its contract prices.

In 2Q18, CSE generated a strong cash inflow of S$27.9m, mainly due to higher collections from trade receivables due to milestone completions for some projects. This could support CSE’s 2018 dividend target of 2.75 S cents/share or a S$14.2m payout. The dividend target translates into a commendable yield of 6.1%.

We maintain our 2018 net profit forecast but cut our 2019-20 net profit forecasts to S$19.8m (-9.0%) and S$21.8m (-12.0%) respectively. We have factored in a lack of new project wins as CSE continues to see a lull in large greenfield projects for its O&G segment.
Risks include fewer-than-expected project wins and gross margin pressure due to rising competition.

Maintain BUY with a lower PE-based target price of S$0.58 (previously S$0.61), pegged to peers’ average of15.0x 2019F PE.
Going forward, we see potential upside, as the impact of the synergies between Serba and CSE start to flow in, which could come in the form of JVs or possible outsourcing of work.
The stock offers a commendable and sustainable yield of 6.1%, backed by a healthy operating cash flow.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-08-15

SGX Stock Analyst Report BUY Maintain BUY 0.58 Down 0.610